June 28 (Bloomberg) -- China’s efforts to contain the risks from a surge in local-government debt may hurt growth in the world’s third-biggest economy, investment bank China International Capital Corp. said.

A report by the chief auditor last week indicated officials may take “relatively forceful measures” including strictly controlling new borrowing, CICC economists led by Hong Kong- based Ha Jiming said in a report today. The effect may be to “limit the source of funding for infrastructure projects and affect future economic growth.”

Chinese policy makers are grappling with the risks posed by the credit boom that fueled the nation’s comeback from the global recession. Fitch Ratings says lenders’ weakened financial positions as asset quality deteriorates could limit the nation’s ability to respond to any renewed global slump with more stimulus measures.

Next year, after the end of existing fiscal stimulus, “the funding of infrastructure projects will face greater pressure, so fixed-asset investment growth may decelerate and we can’t be optimistic about the outlook for the economy,” the CICC economists said.

Chinese banks may face a wave of bad loans from lending to local-government financing vehicles under the stimulus program begun in November 2008, Victor Shih, a political economist at Northwestern University, and Citigroup Inc. have warned separately.

Weakening Asset Quality

According to Fitch, lending so far may have limited the government’s options in the future.

A future deterioration in lenders’ asset quality is a “near-certainty,” Charlene Chu, a senior director in financial institutions ratings for Fitch in Beijing, told a conference in Hong Kong last week. “Chinese banks’ financial positions are more strained than it appears,” she said.

In an e-mail, she said that in the wake of last year’s record $1.4 trillion of lending, banks would be less able to engage in as large a stimulus as in 2008 and 2009. This could make any potential double-dip recession more protracted, she said.

The China Banking Regulatory Commission estimates that outstanding loans to funding vehicles set up by local governments rose 70 percent to 7.38 trillion yuan at the end of 2009 from a year earlier. In the first quarter of 2010, about 40 percent of new loans went to such entities, according to the CBRC. The vehicles are used because local governments can’t borrow directly.

Slowing Growth

In a “worst-case scenario,” the non-performing loans of local-government financing vehicles could reach 2.4 trillion yuan ($350 billion) by 2011, Citigroup said in March. Shih said separately that a crackdown on lending could lead to a “gigantic wave” of bad debts.

The CICC analysts said today that the borrowing won’t lead to a crisis for China for reasons including the government’s growing revenue, relatively low level of debt overall and large asset base.

Liu Jiayi, the nation’s chief auditor, indicated last week in a report to a standing committee of the National People’s Congress that some local governments’ debt burdens are excessive.

Fiscal Risk

The official cited cases of debts amounting to more than 100 percent of local governments’ available fiscal resources in an audit of 18 provinces, 16 cities and 36 counties. In one case, the level is 365 percent, Liu said.

Officials must “strictly control” local government borrowing and prevent “the financial risk evolving into a fiscal one,” Liu said.

China’s gross domestic product grew 11.9 percent in the first quarter of 2010 from a year earlier, the fastest pace in almost three years. The risk that the nation could have a “hard landing” has been one of the biggest sources of anxiety for global investors this year, Tim Condon, a Singapore-based economist at ING Groep NV, said last week.

In November 2008, the government scrapped quotas that limited banks’ lending and pressed them to support a stimulus program devised to shield the economy from the effects of the global financial crisis. The result was a flood of cash.

Some of the money went into property, fueling speculation that contributed to record price gains, and some was channeled into the local-government financing vehicles.

China’s banking regulator said June 15 that it sees growing credit risks in the real-estate industry and warned of increasing pressure from non-performing loans. The State Council, China’s cabinet, this month ordered local governments to ensure repayment of debts by the financing vehicles and concentrate on completing projects already underway.

In fact if you remove figures intentionally in dollars, for few years China surpassed USA in world's largest economy. Moreover, if you add the facts that all publications, and all great organisations that published these studies, are either IMF, World Bank, or CIA, ie, western organisations, in fact USA.As we've already seen, most of their publication, their economy's figures, their claims are all lies. I guess that Russia has already overpassed Germany, idem, Brazil.Indeed, if you take a look, the rare areas where Brics are not still present in global market, is microprocessors, hard disk, memories, but, Iam near sure, they will soon be present.I wish to buy for my computer a russian processor, beside, chinese hardisk, indian DDRAM memories, and brazilian's operating system origin.How many times shall we await ?

The U.S. — the world's largest economy since the 1880s — is on the verge of losing its status as the world's largest economy, and is likely to slip behind China this year, says the International Comparison Program, part of the World Bank.

In 2005, the World Bank estimated China's economy was less than half the size of America's, equaling just 43 percent of America's total output. But in 2011 the research placed China's GDP at 87 percent of the U.S., reflecting China's staggeringly enormous economic growth, as well as an updated methodology on purchasing power parity (the amount of goods and services money buys) that recognizes that money goes much further in developing economies than it does in wealthier economies.

With China's economy now expected to have grown 24 percent between 2011 and 2014 while the U.S. is expected to expand only 7.6 percent in that period, China is on course to overtake the U.S. this year. China has already overtaken the U.S. as the world's largest trading nation.

The new measurements dramatically change the shape of the global economic landscape, emphasizing the importance of developing economies. For example, India becomes the world's third-largest economy having previously been in tenth place. The size of its economy also dramatically expanded from the equivalent of 19 percent of the U.S. economy in 2005 to 37 percent in 2011. Russia, Brazil, Indonesia, and Mexico have also grown significantly.

Of course, the U.S. remains vastly ahead of China in terms of economic activity per person. The U.S. has just 4.44 percent of the world's population, while China has 19.1 percent, so it is unsurprising to see China catch the U.S. in terms of total activity. But in terms of economic activity per person, the U.S. is further down the list, in sixth place behind Qatar, Luxembourg, Norway, Singapore, and Brunei.- - John Aziz

Lindsey Williams: "The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine."

"On Thursday, Sept. 6... just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar

Faster than anyone would expect. This Chinese are truly amazing!Well it took 143 years and this is certainly the biggest news of the decade although certain jewish media networks will downplay it.The rest will come deterministically after this in the next couple decades.

Hannibal Barca wrote:Faster than anyone would expect. This Chinese are truly amazing!Well it took 143 years and this is certainly the biggest news of the decade although certain jewish media networks will downplay it.The rest will come deterministically after this in the next couple decades.

I can only hope that this trend will continue... Much like in the stock market, a country whose GDP and economy (in general) grows like notin' else for a long period of time will almost always come back down. Over time*

Hannibal Barca wrote:Faster than anyone would expect. This Chinese are truly amazing!Well it took 143 years and this is certainly the biggest news of the decade although certain jewish media networks will downplay it.The rest will come deterministically after this in the next couple decades.

I can only hope that this trend will continue... Much like in the stock market, a country whose GDP and economy (in general) grows like notin' else for a long period of time will almost always come back down. Over time*

I want to apologize to the Chinese friends in this forum... but Hanoi will not like it... due to the current disputed territories and due to the history of conflicts and mistrust between the two countries.

China is now officially the largest economy in the World and surpass US.

it is not, PPP is by far not so important then GDP, ther purchising power might be bigger now = ther abillity to get credit and the availability of ther currency and its exchange in the global market, but i doesnt say nearly anything about ther output, so calm your balls down

China is now officially the largest economy in the World and surpass US.

it is not, PPP is by far not so important then GDP, ther purchising power might be bigger now = ther abillity to get credit and the availability of ther currency and its exchange in the global market, but i doesnt say nearly anything about ther output, so calm your balls down

It's far more complicated than that, a large chunk of the US GDP is heavily reliant on banks that rely on credit default swaps, credit default obligations to survive, some of the worst and most toxic assets in the business world. Case in point you have Lehman Brothers, a powerful bank that saw so much success that they managed to accumulate over $600 billion in assets, but then in 2008 the company evaporated over night. How can that be possible? Why did the U.S. banking sector needed nearly $800 billion in TARP money to survive, only to get an additional +$20 trillion of 0% interest credit to prop them up from the Federal Reserve for them to survive? The U.S. govt. decided they were "too big to fail", meaning they make up a huge part of the GDP to warrant propping them up. The top banks use high frequency trading to lend with CDS's, CDO's more than hundreds and many times thousands of times more than the actual money and assets that the bank has at any given time. The mere fact that they require several trillion from the U.S. govt./Federal Reserve to prop them up and heavily subsidize their industry, indicates that the banking sector is just one huge bubble market living off on a collective Ponzi scheme called derivatives. If the likes of banks such as Goldman Sachs, J.P. Morgan, Morgan Stanley with combined assets in the several trillion Dollar range go down the drain, it means a large chunk of the U.S. GDP will go down the drain with them!

im a liberterian when it comes to economics, you dont have to tell me that a big part of US-GDP is toxic, based on debt like a ponzi scheme, but that doenst make PPP more important, btw.! china is facing huge problems on its own with credit in specialy the housing market, ther "national" sitution with debt is solid, like ther budged but that can change fast, several of ther citys are 300-500% in debt compared to ther actaull output, i think one city was actaully 2100% in debt to its output, will try to find that documentary later. will see how china will handle this upcomming problems, they did quite good in deflating some of ther housing bubbels till now.

higurashihougi wrote:The main thing here is that, GDP per capita of China is still not very high, and the wealth gap in China is damn huge.

That means there is a lot of things for China to do in order to be a real 1st.

Well commies you still can't get along with the fact that Chinese decided to adopt a modern version of national socialism (or capitalism I shall better say) and reached the world's crown in really no time. Denialists and whiners is what make success the pleasure it really is Take a look, Porsche just announced that this year for the first time their biggest market is China.

higurashihougi wrote:The main thing here is that, GDP per capita of China is still not very high, and the wealth gap in China is damn huge.

That means there is a lot of things for China to do in order to be a real 1st.

Well commies you still can't get along with the fact that Chinese decided to adopt a modern version of national socialism (or capitalism I shall better say) and reached the world's crown in really no time. Denialists and whiners is what make success the pleasure it really is Take a look, Porsche just announced that this year for the first time their biggest market is China.

Huh? How on Earth are National Socialism and Keynesian-like Capitalism alike?Yeah their economy grew fast, but IMHO it hit its height *until* the people of China can gather more wealth. The car market there is huge, Buick and GM love it!

You people fail to realize. China is so strong that she is barely started yet. She is about the level USandA was prior to the civil war, a good 100 years up yet.When they will reach their climax, inevitably, will have a few times bigger economy that anyone else.Keynesian? Hell, no!

Hannibal Barca wrote:You people fail to realize. China is so strong that she is barely started yet. She is about the level USandA was prior to the civil war, a good 100 years up yet.When they will reach their climax, inevitably, will have a few times bigger economy that anyone else.Keynesian? Hell, no!

Not what I'm saying.... China is an economic powerhouse, does this mean they are going to be stable and steadily-grow? - No! They need to have their population be wealthy, not just their government and a couple billionaires here and there. I wouldn't be surprised if there economy is twice the size of the US's in coming decades, but they are a much bigger country... - They need something other than manufacturing, as countries are slowly becoming self-reliant again. At least they have large mineral reserves, which I'd love to see utilized!

- When I mention "Keynesian", I mean any economy with weak money etc. That is the basis of Keynesian ideology after all; control via bubbles, and a worthless dollar. With their mineral reserves, they could go onto a "X standard", but that will never happen anyway.

Hannibal Barca wrote:You people fail to realize. China is so strong that she is barely started yet. She is about the level USandA was prior to the civil war, a good 100 years up yet.When they will reach their climax, inevitably, will have a few times bigger economy that anyone else.Keynesian? Hell, no!

Not what I'm saying.... China is an economic powerhouse, does this mean they are going to be stable and steadily-grow? - No! They need to have their population be wealthy, not just their government and a couple billionaires here and there. I wouldn't be surprised if there economy is twice the size of the US's in coming decades, but they are a much bigger country... - They need something other than manufacturing, as countries are slowly becoming self-reliant again. At least they have large mineral reserves, which I'd love to see utilized!

they need to stop devalounig ther currency artificialy, that will maybe slow the (cheap) exports since ther products will become more expensive for importers but internal market will start booming then the strenghing of the currency will lead to more purchasin power of the people, till now they export nearly everything ther produce, and ther own people cant afford it, to a big part becouse ther money is not worth much, but every chinese factory worker who puts this waching-machines together doesnt think "im glad i dont have one of these" of course he wants it! china right now is robbing ther people of wahlth by keeping ther currency low, inflation is also called the invisible tax for a reason

the second thing they need to strengh ther internal market, strenghing ther currency and giving back wealth to the people is one thing, they need to liberalize the laws specialy in the direction of start up entrepreneurs, the small buisness!!! the big fat cats have ther heaven in china but starting a buisness for normal people is hell!!

Stock Market Crash in China Biggest Since 2009, Rest of World Set to Rally

Beijing’s attempts to crackdown on speculative trading in the overheated mainland stock markets have triggered a sell-off, panic among investors and ultimately, a stock exchange crash today, triggering significant spillovers for the global economy.

MOSCOW, January 19 (Sputnik), Kristian Rouz – The long-anticipated doom landed today as stock markets in mainland China and, to a lesser extent, in Hong Kong, experienced a sharp decline after regulatory bodies in Beijing made a conscious attempt at curbing margin trading, as they were concerned with escalating risks to the nation’s financial system. Consequently, the Chinese stock market, overvalued on cheap credit, crashed in its biggest drop since 2009, driving a global demand for safe havens among investors. Japan’s markets have grown as a result, and Europe and the US are posed for gains today on the expected influx of capital, leaving mainland China.

The Shanghai Shenzhen CSI 300 Index slumped 7.56% by 1 p.m several hours before the end of trading. The Shanghai Composite dropped 7.42%, Shenzhen Composite lost 3.11%, while Shenzhen Component declined by 6.68%. Hong Kong’s Hang Seng also suffered, in part due to the existence of the Stock Connect scheme with Shanghai bourses, and also in part because of the political dependence on Beijing. Asia’s flagship stock exchange lost 1.58% by 1 p.m.

The rest of Asia-Pacific gained as investors’ money rushed in Japan, Taipei and Singapore. Tokyo’s Nikkei 225 added 0.89%, TOPIX rose by 0.64%, Taiwan Stock Exchange added 0.39%, Korea’s KOSPI edged up 0.77%. Singapore’s Straits Times Index added 0.18%. However, the general sentiment in Asia-Pacific is gloomy, as mainland China has been the principal source of growth in the region due to it’s huge volumes of resources consumption. Given that, the MSCI Asia Apex 50 Index slid by 0.73%.

Despite the newly found optimism in Japan’s stock markets, the crash in China is negatively affecting the former’s economy. The yen rose 0.3% to 117.15 against the dollar on the influx of investment money in Japan, hitting exporters and adding to the deflationary pressure of cheap energy.

“The slide in Shanghai stocks is leading to yen buying,” Yuji Saito of Credit Agricole in Tokyo told Bloomberg. “With risk sentiment deteriorating right now, anything obscure will lead to reducing positions.”

Tomorrow China is releasing a report on GDP growth, and it is expected to have slowed down to 7.2% in Q4, meaning the expansion of mainland’s economy in 2014 fell short of the government target of 7.5%, the lowest since 1990. China’s stock markets are likely to shrink further if such allegations are confirmed.

In Europe, the Swiss franc slid against 16 major currencies, easing concerns of the capital flight from the Eurozone. The franc retreated 0.9% to 0.8662 against the dollar after it skyrocketed by 21% on January 15. A scheduled policy meeting of the European Central Bank (ECB) is due Thursday, and most investors are still almost certain the regulator will launch a stimulus program of sorts, though the recent developments in Asia-Pacific will yield some moderate optimism in Europe; the hawks in Brussels might be adamant in their push for the reform as well. The possible ECB stimulus is speculated to be limited in its initial scale to 500 bln euros, small in scale for the struggling nations of the Mediterranean to be satisfied and for the investors to change their attitude to the Eurozone radically.

Some observers believe the ECB will not directly buy Eurobonds at first, rather providing only credit guarantees to the nations in need in total volume not exceeding 3 trln euros.

The US dollar and oil prices were flat, with latter retreating $0.26/bbl of Brent crude, down to $49.91/bbl.